A.M. Best Revises Outlook To Positive For First American Financial Corp. And Its Title And PC Insurance Subsidiaries

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of the five title insurance subsidiaries (collectively referred to as the First American Title Insurance Group) of First American Financial Corporation (FAF) [NYSE: FAF]. These five title insurance subsidiaries are: First American Title Insurance Company, First American Title Insurance Company of Australia Pty Limited (Australia), First American Title Insurance Company of Louisiana (New Orleans, LA), First Title Insurance plc (United Kingdom) and Ohio Bar Title Insurance Company (Columbus, OH).

In addition, A.M. Best has revised the outlook to positive from stable and affirmed the ICRs of “a” as well as the FSR of A (Excellent) of First American Property & Casualty Insurance Company and First American Specialty Insurance Company, collectively referred to as First American P&C Group. The outlook for the FSR is stable. Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the ICR of “bbb-” of FAF. All companies are domiciled in Santa Ana, CA, unless otherwise specified.

The positive outlook reflects First American Title Insurance Group’s improved risk-adjusted capitalization, driven by its improved operating results and lower underwriting and affiliated investment leverage, as well as its significant market presence in the title industry. The group maintains a strong franchise value and benefits from the financial flexibility and operational support from FAF, which maintains relatively modest financial leverage and solid interest coverage. First American Title Insurance Group’s underwriting leverage measures significantly improved in recent years due to its overall surplus growth, improved operating results, cost reduction initiatives and declining premium volume.

These positive rating factors are somewhat offset by First American Title Insurance Group’s continuing challenges of managing the real estate cycle as well as its significant reserve strengthening actions in recent years due to unfavorable loss development in prior policy years. Revenue and profitability were both negatively impacted in 2008 as a result of the prevailing economic environment, which affected the real estate dependent title insurance market. However, operating results have rebounded since 2009. This rebound was mainly by reason of cost reduction initiatives as the group focused on managing the real estate cycle. While the housing/real estate market has shown some improvement in recent quarters, characterized by a rebound in the purchase market, the group will likely continue to face a challenging operating environment owing to increased interest rates.

The rating actions for First American P&C Group recognize its continued favorable trend of operating performance, solid risk-adjusted capitalization and reduced underwriting leverage in recent years. This group’s positive results are derived from its strict underwriting discipline and loss control guidelines, which have resulted in consistent underwriting profitability and favorable operating results over the years, despite wildfire and severe weather-related activity. The ratings also recognize First American P&C Group’s use of multiple distribution channels to market its products. Besides brokers and independent agents, First American P&C Group is able to leverage FAF’s advanced computer systems and title distribution networks to facilitate direct escrow sales of homeowners’ insurance.

FAF’s ICR acknowledges the capital strength of its insurance subsidiaries, its modest financial leverage and adequate interest coverage measures.

While A.M. Best believes FAF and its operating companies are well positioned at their current rating levels, factors that may lead to positive rating actions include a sustained trend of improved operating results, while maintaining favorable underwriting leverage and risk-adjusted capitalization. However, factors that may lead to negative rating actions include a trend of deteriorating underwriting and operating profitability and the erosion of surplus to such an extent that it causes a significant rise in the organization’s underwriting leverage measures.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Copyright Business Wire 2010